Wednesday, September 17, 2008

In a semi-departure from our usual fare, yesterday's column dealt mostly with reporting and analyzing the historic events of the previous day's news cycle. (And in case you missed it, the only mechanism for linking capital to businesses who need that capital, came unceremoniously apart in front of our very eyes, with such swiftness and lack of upside so as to leave The Key Grip stocking up on canned goods.) Only in the waning paragraphs did the conversation turn to the spectacular gaffe committed by Senator McCain on the subject, together with an unusually effective commercial that was immediately placed in rotation by Obama/Biden.

The reasons for demurring on the political ramifications of the Lehman/AIG/Merrill debacles were threefold: First, the events themselves were so large and so grave that political interpretations seemed, in the heat of the moment, almost beside the point. (One rather doubts that there was much arguing between the helmsman and the crow's nest as the Lido deck of the Titanic was slipping beneath the surface.) Second, the political implications are easy enough to explain but may prove more challenging to capitalize on, which left the column with the dilemma of over-selling Mr. Obama's windfall. And third, the column was going to be long enough already.

First the story you probably know, and probably presumed this column would be all about: It is the late 1980s, and the Savings and Loan scandal unraveled into a full-scale debacle (remember that little tiny hiccup in the financial sector? remember how it started?). One of the largest thrifts in the country, Lincoln Federal Savings and Loan, is about to fail in such a mushroom cloud of shoddy practices and questionable dealings as to almost certainly destroy, perhaps even criminally, the firm's top executives, including one Charles Keating. So what does Mr. Keating do? He approaches five individual Senators, Alan Cranston (D-CA), Dennis DeConcini (D-AZ), John Glenn (D-OH), John McCain (R-AZ), and Donald W. Riegle (D-MI), to implore them to impede the investigation by the Federal Home-Loan Bank Board into the company's books. He buys them lavish gifts, he sends them on expensive trips, he makes substantial contributions to their campaigns. And then he goes to jail, anyway. Three of the Senators, Cranston, DeConcini, and Riegle, are found to have substantially interfered in the FHLBB investigation, while Glenn and McCain are upbraided on the Senate floor "for having displayed poor judgment."

If you're a Democrat, it's a delicious story to tell (if not to re-live), but it carries with it the fatal flaw of antiquity. At roughly this same time, the McCain people would surely counter, Senator Biden was caught plagiarizing a speech. It wasn't much earlier than this when Senator Obama was still, by his own admission, experimenting with drug use. And naturally the McCain team would emphasize that McCain was "cleared" in the investigation. My guess is that, if the Obama people felt there was fertile ground to be sown in this story, they would have done it by now.

No, the real difficulty for McCain, as he suddenly and breathlessly embraces the idea of increased government oversight, is that he and his own closest colleagues are directly and personally responsible for the entire mess. And this you could be forgiven for not knowing. In 1999, the Republican caucus in the Senate, led by McCain friend and colleague Phil Graham (remember him? of course you do, you whiner), pressed for and got a bill that repealed the most basic cornerstone of financial market regulation, the Glass-Steagall act, which, among rather a lot else, would have prevented insurance companies from speculating in equities markets. McCain, in his senior position on the relevant committees, was front-and-center in pushing the repeal, even spoke on its behalf from the Senate floor.

Slam-dunk for Team Good-Guys? Not a bit of it. For one thing, there is the newest page in the Republican playbook, which says that outright lying is perfectly fine as long as low-information voters perceive an offsetting penalty from the other side. McCain could simply say, "I never supported that legislation," and, as long as Obama didn't show footage of him, supporting that legislation, the fact that it is a patent and willful untruth would register only with those voters who've already decided who will have their support in November. On top of this, banking regulation is a tough sell as a campaign hot-button, even for high-information voters. Some of my closest friends and colleagues at the college where I teach economics don't really understand their own retirement accounts--much less the implications of making it legal (or illegal) for an insurance company to own shares of a stinky mortgage portfolio. In such a climate, pressing Mr. McCain on this subject could make Mr. Obama appear pedantic and shrill, while McCain could simply shake his head and say, "I'm a maverick!" and win everybody back and then some. And don't you dare roll your eyes because it's already worked.

My read of the situation is that Mr. Obama is far, far better off keeping with the bigger theme that McCain's overall philosophy is out-dated, too similar to that of Mr. Bush, and, wait for it, out of touch. Certainly the quote delivered by McCain in Jacksonville has every appearance of one of those "gifts that keeps on giving" in this campaign, and the Obama people would be foolish to retire their swift and snappy advertisement about the subject before every last person in the country is begging them to stop airing it out of pure satiation with its message. In this respect, if none other, the Obama campaign is playing its air-war exactly, perfectly right.

Which leaves only the question of what either one of these two candidates can actually do about the situation, should he become President. The short answer is, nothing that wouldn't hurt. The slightly longer answer is the third in our three-part series on the subject. Stay tuned.